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Is the Arms Length Principle a conduit for tax evasion ?.

Is the Arms Length Principle a conduit for tax evasion ?


UBSBy Moses Kulaba

In recent years the concept of arms length principle has become controversial in tax debates. The core of the discussion revolves around the fact that in this interconnected digital globalised economy the concept has become a conduit for tax evasion as multinational companies manipulate prices to achieve a tax advantage. This article critically discusses the concept of Arms length principle and showing how this is dealt with in Tanzania’s Income Tax Act to control manipulation of Transfer prices

 The arms length principle of transfer pricing states the amount charged by one related party to another for a given product must be the same as if the parties were not related. An arm’s length price for the transaction is therefore what the price of that commodity would be on the open market[1] According to the Arm’s length principle the conditions of cross border transactions between different parts of multinational enterprises should not differ from those which would be agreed between independent firms i.e they should not be distorted by the control relationship that exists between them[2]. From the above descriptions, it is evident that the concept of Arm’s length arises where there are transactions between related parties. The Arm’s length principle is therefore used in determining whether the companies or related entities are engaging in transfer pricing or mispricing arrangement through manipulation of their prices to achieve tax avoidance or evasion purposes.

 By definition, transfer pricing refers to an economic term which refers to the valuation process for transactions between related entities or parties. Transfer mispricing occurs when the prices between related or associated companies is not under the arms length principle.  A transfer pricing arrangement is said to occur whenever two or more business (whether corporations or not) which are owned or controlled directly or indirectly by the same people trade with each other. The term is used because if the entities are owned in common they might not fix prices at a market rate but instead fix them to achieve another purpose[3] In some literature transfer pricing refers to the allocation of profits for tax and other purposes between parts of a multinational corporate group[4]. For more read this article via: http://www.gepc.or.tz/?p=455